LRS General Discussion, page-6301

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For Lake Resources and its retail shareholder army, this should have been a week of triumph. The stock was earmarked for inclusion in the S&P/ASX 200 three weeks ago, and on Monday it officially made its debut in the big leagues.But its first week in the top 200 has been marked by calamity as the stock has nearly halved in three brutal trading sessions. Most of that plunge appears to be entirely self-inflicted.

On Monday, five minutes before the debut, the company announced that managing director Stephen Promnitz was leaving the firm and stepping off the board. It appears he then proceeded to dump his entire 10.2 million holding.Amid a wave of selling, Lake Resources (LKE) has shed more than 50 per cent of its value in just three days in a comical implosion.But is this a case of unfortunate timing? History would suggest not. The Lake debacle is just another example of the sloppy graduation process in which excessively promoted stocks somehow make it into the index, only to come crashing down to earth as the scrutiny intensified.

Yet again, a stock promotor’s playground has turned into a hedge fund happy house where the fun is fed by retail hubris and institutional apathy.So how did this fiasco play out? It starts with the heavy promotion of Lake Resources, which has billed itself as a future top five lithium producer, on social media platforms such as Twitter to a cohort of retail punters.

Lithium sector hubrisThe promotion was aided by favourable research reports in which the brokers and the authors are paid in stock and options. Social media posts do not always articulate the arrangement.(In a response to questions, the company said it expected “any firm that chooses to write research on us to make the proper disclosures in their research notes to the market – as they are required to do under their various licenses”.)This (paid for) enthusiasm for Lake and general hubris in the lithium sector helped catapult the market capitalisation to a peak of $3 billion, and eventual eligibility for inclusion on the S&P/ASX 200.And so, on June 3, S&P Dow Jones Indices announced that effective June 20, Lake, along with another retail favourite BrainChip, plus Core Lithium and New Hope would replace Appen, Codan, Polynovo, Platinum and Tyro in the main benchmark index.For holders that was great news. It meant a wall of price-agnostic passive index funds and quasi passive super funds would be buying in, bidding up the value of the stock.But as is so often the case, S&P/ASX 200 inclusion tends to mark the peak in proceedings.

The imminent arrival of institutional owners means that more proxy advisers are called in to examine their corporate governance. And as we have seen time and again, they are aghast at what they find.Meanwhile, index sensitive institutions (which aren’t always the passive funds) begin accumulating shares in these companies and make those shares available to hedge funds to borrow.The hedge funds can finally act on their sceptical views by shorting the shares, when it was previously not possible or prohibitively expensive.That’s exactly what happened in the case of Lake.

Short interest ramped up dramatically in the lead-up to the index date, with 45 million shares sold short. Demand is so strong the fee to borrow is about 20 per cent a year.Sometimes the analysis isn’t all that deep for traders that have seen this story before. One hedge fund said it shorted the shares purely because the company was buying adverts on Twitter – a surefire indication of an egregiously promoted stock.But even they could not have anticipated the managing director would quit and dump all his stock on index inclusion day, handing them a windfall gain.